I’m in my 40s looking to retire in 20 years and live off $200k a year – how much do I need to save?

A Reddit user is wondering how much he needs to save for retirement. He’s in his 40s, earning $500K, and is hoping to retire when he reaches the age of 60. So, how much would he need to invest in order to be ready to leave work on schedule. 

Setting a retirement savings goal

The first thing to do when deciding how much to save or retirement is to make sure you have realistic expectations for how much you will actually need to spend as a retiree.

The Redditor here said he’s earning $500K but he wants to generate $200,000 in income for retirement. This would mean taking a pretty big pay cut, which he could end up regretting — especially since he is planning to retire young and will need to pay for medical insurance without employer subsidies for five years before becoming Medicare eligible. 

The general rule-of-thumb is to try to replace around 70% to 80% minimum of what you were earning, so with a $500K income, that would be closer to $350k minimum. So, the Redditor may want to think really carefully about his future spending needs before he projects that an income of $200K is going to be enough. 

Deciding how much to save

After thinking carefully about the right amount of income to live on in retirement, then it’s time to set your nest egg goals. If you follow the 4% rule, you can do this easily by multiplying the amount of income that you want by 25. So, if the Redditor wants to have $200K in annual income, he would need a nest egg worth $5 million.

There is, however, some concern that the 4% rule no longer protects you from running out of money due to longer lifespans and lower expected future returns. Morningstar experts recommend limiting withdrawals to 3.7% of your balance so if that’s the case, the Redditor would need around $5,405,000 to generate $200K in income. 

Once you have an idea of the total amount you need, the Savings Goal calculators at Investor.gov tell you the amount to invest monthly to get to your target based on your projected future returns as well as the amount of money that you are starting with and your investing timeline. 

The Redditor didn’t specify the exact amount he’s starting with, but it makes a difference. If he has nothing saved yet and wants a nest egg of $5.4 million in 20 years, he’d need to invest $7,856.83 per month assuming a 10% average annual ROI. If he already has $1 million, he wouldn’t actually need to invest anything more since the compound interest alone would get him to over $6 million without investing another dollar.

The Redditor will also have to decide where to invest his money as well as how much to invest each month. Since he’ll already have hit 59 1/2 by retirement, he can choose to take advantage of tax-advantage plans but due to contribution limits, he may need to put some money into a taxable brokerage account as well.

A financial advisor can help him to determine exactly how much to invest, and which accounts to put the funds into, so he can ensure he’s ready to build the future he is hoping for. With $500K in annual income, he should have plenty of money to work with, but will want to make sure his goals are realistic regarding the income he needs to live on in his senior years.